NOTES
TO FINANCIAL STATEMENTS
NOTE
1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE
OF OPERATIONS
Sunstock,
Inc. (“Sunstock” or “the Company”) was incorporated on July 23, 2012 under the laws of the State of Delaware
to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. Sunstock may
attempt to locate and negotiate with a business entity for the combination of that target company with Sunstock. The combination
will normally take the form of a merger, stock-for-stock exchange or stock-for-assets exchange. In most instances the target company
will wish to structure the business combination to be within the definition of a tax-free reorganization under Section 351 or
Section 368 of the Internal Revenue Code of 1986, as amended. No assurances can be given that Sunstock will be successful in locating
or negotiating with any target company. Sunstock has been formed to provide a method for a foreign or domestic private company
to become a reporting company with a class of securities registered under the Securities Exchange Act of 1934.
On
July 18, 2013, the Company has changed its name from Sandgate Acquisition Corporation to Sunstock, Inc.
On
July 18, 2013, Jason Chang and Dr. Ramnik S. Clair were named as the directors of the Company.
On
October 30, 2013, the Company entered into a Purchase Agreement with Dollar Store Services, Inc. to develop, design and build
out a retail store which the Company opened in February 2014. The Company opened its second retail store in May 2014. On August
21, 2014 the first store was forced to close due to below code electrical wiring the landlord had provided. Perishable inventory
at this store was relocated to the second store as nonperishables were moved into storage along with fixed assets. The Company’s
second store was relocated in December of 2015 under lease running through June 2017 and operated on a month to month lease from
then until the store was closed in September 2018. The Company currently operates no variety retail stores. The Company plans
to continue purchasing more precious metals in silver and currently searching for a hotel in the Central California are as their
previous selection in escrow during the 4th quarter of 2017 did not close.
On
October 22, 2018, Sunstock, Inc. acquired all assets and liabilities of Mom’s Silver Shop (see NOTE 11), Inc. of
Sacramento, California. Included in the assets acquired was approximately $60,000 in precious metals inventory and approximately
$13,000 in net fixtures. Also included were any licenses and permits, customer lists, logo, trade names, signs, and websites.
Financing of the purchase was by $20,056 cash, $33,000 unsecured note payable with principle payments of $1,000 per week for 33
weeks starting January 1, 2019 with 4.5% annual interest accrued on the unpaid balance (total accrued interest due August 27,
2019), and the assumption of liabilities and lease obligations. Mom’s Silver Shop had unaudited net revenues of approximately
$4,800,000 for the year ended December 31, 2015, $4,000,000 for the year ended December 31, 2016, $3,800,000 for the year ended
December 31, 2017, and $2,500,000 in 2018 to the date of acquisition. Mom’s Silver Shop specializes in buying and selling
gold, silver, and rare coins, and is one of the leading precious metals retailers in the greater Sacramento metropolitan area.
BASIS
OF PRESENTATION
The
summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial
statements. Such financial statements and accompanying notes are the representations of the Company’s management, who are
responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted
in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing
the accompanying financial statements.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates made by the Company’s management include realizability and valuation of inventories and value of stock-based
transactions.
CONCENTRATION
OF RISK
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company places
its cash with high quality banking institutions. The Company did not have cash balances in excess of the Federal Deposit Insurance
Corporation limit as of December 31, 2018 and 2017.
INVENTORIES
Inventories
– metals and coins consist primarily of silver and small amounts of gold held for sale and stated at fair value and coins
stated at lower of cost or market. Currently, the Company anticipates holding its precious metals as a long-term investment. Depending
on market conditions, the Company anticipates holding its silver holdings until the market price exceeds $50 per ounce. Likewise,
the Company does not plan to sell its gold holdings unless the market price exceeds $2,500 per ounce. The Company acquired collectible
coins in the purchase of Mom’s Silver Shop. Collectible coins are purchased and then sold at a markup.
At
each balance sheet date, the Company evaluates its ending inventory quantities on hand and on order and records a provision for
excess quantities and obsolescence. Among other factors, the Company considers historical demand and forecasted demand in relation
to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence
and net realizable value. In addition, the Company considers changes in the market value of components in determining the net
realizable value of its inventory. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable
values. Once established, write-downs are considered permanent adjustments to the cost basis of the excess or obsolete inventories.
PRECIOUS
METALS AND COINS
Inventories
– silver principally include bullion and bullion coins and are acquired and initially recorded at fair market value. The
fair market value of the bullion and bullion coins is comprised of two components: 1) published market values attributable to
the costs of the raw precious metal, and 2) a published premium paid at acquisition of the metal. The premium is attributable
to the additional value of the product in its finished goods form and the market value attributable solely to the premium may
be readily determined, as it is published by multiple reputable sources. The Company’s inventory - silver are subsequently
recorded at their fair market values on a quarterly basis. The fair value of the inventory is determined using pricing and data
derived from the markets on which the underlying commodities are traded. Precious metals commodities inventory are classified
in Level 1 of the valuation hierarchy.
The
change in fair value of the precious metals was included in the financial statements herein as recorded on the Company’s
Statements of Operations as an Unrealized gain (loss) on investments on precious metals of ($26,147) and $23,327 for the years
ended December 31, 2018 and 2017, respectively.
The
Company acquired Mom’s Silver Shop in October 2018 to enter the market for collectible coins. The Company acquires collectible
coins from both companies and individuals and then marks them up for resale. The inventory is recorded at lower of cost or
market. Inventory can fluctuate in relation to when it is purchased and when it is sold. Inventory was $20,647
at December 31, 2018, which was low due to sales during the holidays.
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of 3
to 5 years. Any leasehold improvements are amortized at the lesser of the useful life of the asset or the lease term.
LONG-LIVED
ASSETS
The
Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the expected future cash flow from the use of the asset and its eventual
disposition is less than the carrying amount of the asset, an impairment loss is recognized and measured using the fair value
of the related asset. No impairment charges were incurred during the years ended December 31, 2018 and 2017. There can be no assurance,
however, that market conditions will not change or demand for the Company’s services will continue, which could result in
impairment of long-lived assets in the future.
REVENUE
RECOGNITION
On
January 1, 2018, the Company adopted FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts
with Customers (“ASC 606”). The new guidance sets forth a new five-step revenue recognition model which
replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces
of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that
a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed
disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.
The
Company’s principal activities from which it generates revenue are product sales. Revenue is measured based on considerations
specified in a contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. These
contracts define each party’s rights, payment terms and other contractual terms and conditions of the sale. Consideration
is typically paid at time of sale via credit card, check, or cash when products are sold direct to consumers
A
performance obligation is a promise in a contract to transfer a distinct product to the customer, which for the Company is transfer
of a product to customers. Performance obligations promised in a contract are identified based on the goods that will be transferred
to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer
of the goods is separately identifiable from other promises in the contract. The Company has concluded the sale of product and
related shipping and handling are accounted for as the single performance obligation.
The
transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the
customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to
which the Company will be entitled to receive in exchange for transferring goods to the customer. We do not issue refunds.
The
Company recognizes revenue when it satisfies a performance obligation in a contract by transferring control over a product to
a customer when product is shipped based on fulfillment by the Company. Taxes assessed by a governmental authority that are both
imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are
excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred
to a customer are accounted for as a fulfillment cost and are included in cost of product sales. The Company does not accept
returns.
INCOME
TAXES
The
Company accounts for income taxes and the related accounts under the liability method. Deferred tax assets and liabilities are
determined based on the differences between the financial statement carrying amounts and the income tax bases of assets and liabilities.
A valuation allowance is applied against any net deferred tax asset if, based on available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized. Therefore, the Company has recorded a full valuation allowance
against the net deferred tax assets. The Company’s income tax provision consists of state minimum taxes.
The
Company recognizes any uncertain income tax positions on income tax returns at the largest amount that is more-likely-than-not
to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained.
The
total unrecognized tax benefit resulting in an increase in deferred tax assets and corresponding increase in the valuation allowance
at December 31, 2018 is $12,501,833. There are no unrecognized tax benefits included in the balance sheet that would, if recognized,
affect the effective tax rate.
The
Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company
had $0 accrued for interest and penalties on each of the Company’s balance sheets at December 31, 2018 and 2017.
EARNINGS
(LOSS) PER COMMON SHARE
Basic
earnings (loss) per share represent income (loss) available to common stockholders divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings (loss) per share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued, as well as any adjustment to income (loss) that would result
from the assumed issuance. The potential common shares that may be issued by the Company relate to outstanding stock options and
have been excluded from the computation of diluted earnings (loss) per share because they would reduce the reported loss per share
and therefore have an anti-dilutive effect.
For
the year ended December 31, 2018 and 2017 there were no potentially dilutive shares that were included in the diluted earnings
(loss) per share as their effect would have been antidilutive for the years then ended.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
Company measures the fair value of certain of its financial assets on a recurring basis. A fair value hierarchy is used to rank
the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair
value will be classified and disclosed in one of the following three categories:
Level
1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as unadjusted quoted prices for similar
assets and liabilities, unadjusted quoted prices in the markets that are not active, or other inputs that are observable or can
be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities.
At
December 31, 2018 and 2017, the Company’s financial instruments include cash, accounts receivable and accounts payable.
The carrying amount of cash and accounts payable approximates fair value due to the short-term maturities of these instruments.
NOTE
2 - GOING CONCERN
The
Company has not posted operating income since inception. It has an accumulated deficit of approximately $52,800,000 as
of December 31, 2018. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations
to meet its obligations, which it has not been able to accomplish to date, and /or obtain additional financing from its stockholders
and/or other third parties.
These
financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations
and continue its operations for the next fiscal year. The continuation of the Company as a going concern is dependent upon financial
support from its stockholders, the ability of the Company to obtain necessary equity financing to continue operations, successfully
locating and negotiate with a business entity for the combination of that target company with the Company.
There
is no assurance that the Company will ever be profitable. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that
may result should the Company be unable to continue as a going concern.
NOTE
3 - RECENT ACCOUNTING PRONOUNCEMENTS
In
June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-07, Improvements
to Nonemployee Share-Based Payment Accounting (Topic 718). The amendments in the update expand the scope of Topic 718 to include
share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of
Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost
(that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).
The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services
to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify
that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer, or (2) awards granted
in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts
with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim
periods within that fiscal year. The Company believes that this will not have a material effect on its financial statements.
In
July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share; Distinguishing Liabilities from Equity; Derivatives and Hedging;
Accounting for Certain Financial Instruments with Down Round Features; Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with
a Scope Exception. An entity will no longer have to consider “down round” features (i.e., a provision in an equity-linked
financial instrument or an embedded feature that reduces the exercise price if the entity sells stock for a lower price or issues
an equity-linked instrument with a lower exercise price) when determining whether certain equity-linked financial instruments
or embedded features are indexed to its own stock. An entity that presents earnings per share (EPS) under ASC 260 will recognize
the effect of a down round feature in a freestanding equity-classified financial instrument only when it is triggered. The effect
of triggering such a feature will be recognized as a dividend and a reduction to income available to common shareholders in basic
EPS. The new guidance will require new disclosures for financial instruments with down round features and other terms that change
conversion or exercise prices. The ASU also replaces today’s indefinite deferral of the guidance in ASC 480-10 for certain
mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests
with a scope exception. The amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018, the amendments in Part II do not require any transition guidance because
those amendments do not have an accounting effect. The Company believes that this will not have a material effect on its financial
statements.
NOTE
3 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows; Classification of Certain Cash Receipts and Cash Payments.
The new standard addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.
The eight issues are: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments
with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration
payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of
corporate-owned life insurance policies, including bank-owned insurance policies; distribution received from equity method investees;
beneficial interests in securitization transactions; separately identifiable cash flows and application of the predominance principle.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within fiscal periods
beginning after December 15, 2019. The Company believes that this will not have a material effect on its financial statements.
In
March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers. The new standard clarifies the implementation
guidance on principal versus agent considerations in Topic 606, Revenue from Contracts with Customers. Topic 606 addresses
that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. When an entity is a principal
(that is, if it controls the specific good or service before that good or service is transferred to a customer) and satisfies
a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled
in exchange for the specific good or service transferred to the customer. When an entity is an agent and satisfies a performance
obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange
for arranging for the specific good or service to be provided by the other party. The new standard is effective for annual reporting
periods beginning after December 15, 2017, including interim periods within that reporting period. This standard did not
have a material effect on the Company’s financial statements.
In
February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842). Under the new guidance,
lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement
date: A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified
asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made
to align, where necessary, lessor accounting with the lessee accounting model and ASC 606, Revenue from Contracts with Customers.
The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize
lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business
entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired
before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. While we are
currently assessing the impact ASU 2016-02 will have on the financial statements, we expect the primary impact to the financial
position upon adoption will be the recognition, on a discounted basis, of the minimum commitments on the balance sheet under our
noncancelable operating lease resulting in the recording of a right of use asset and lease obligation.
NOTE
4 – PROPERTY AND EQUIPMENT
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Furniture
and equipment
|
|
$
|
58,610
|
|
|
$
|
18,166
|
|
Less
– accumulated depreciation
|
|
|
(42,691
|
)
|
|
|
(10,229
|
)
|
|
|
$
|
15,919
|
|
|
$
|
7,937
|
|
Depreciation
expense for the years ended December 31, 2018 and 2017 was $32,462 and $5,528, respectively.
NOTE
5 - RELATED PARTY BALANCES
The combined parents of Jason Chang, the
Company’s Chief Executive Officer and a director, worked for a combined total of 24,000,000 shares of the Company’s
common stock for the year ended December 31, 2018, which were valued at approximately $539,920 upon grant.
During the year ended December 31, 2018,
Jason Chang, the Company’s Chief Executive Officer and director, was awarded 197,610,000 shares of the Company’s common
stock for services valued at an aggregate of approximately $3,935,647 based on the closing price on the grant date.
During the year ended December 31, 2018,
Ramnik Clair, the Company’s senior VP and a director, was awarded 10,500,000 shares of the Company’s common stock
for services valued at an aggregate of approximately $156,450 based on the closing price on the grant date.
During the year ended December 31, 2018,
the Company was provided loans totaling $219,000 by the Company’s CEO. The loans bear interest at 6% per annum. During the
year ended December 31, 2018, $49,750 of the loans were converted into 33,300,000 shares of the Company’s common stock,
which resulted in a loss from settlement of debt of $840,058. In connection with the acquisition of Mom’s Silver Shop, the
Company incurred a $33,000 note payable to the former owner of Mom’s Silver Shop.
During
the year ended December 31, 2017, the Company’s chief executive officer was awarded 18.05 million of the Company’s
common stock for services valued at an aggregate of approximately $19,500,000 (based on the closing price on the grant date),
in exchange for $9,050 in cash and the remaining amount was recorded as stock based compensation expense
in the accompanying statement of operations as the amount was earned through December 31, 2017.
The
combined parents to Jason C. Chang, the Company’s Chief Executive Officer and a director, worked for a combined total of
5,900,000 shares of the Company’s common stock for the year ended December 31, 2017, which were valued at approximately
$7,500,000 upon grant.
During
the year ended December 31, 2017, the Company entered a 19-month lease with the parents of Jason Chang for Corporate office space
at $1,200 per month running through December 2018.
The
wife of Dr. Clair, a director of the Company, was issued 1,000,000 shares of the Company’s common stock for the year ended
December 31, 2017 as compensation for services as assistant general manager, which were valued at approximately $1,200,000
upon grant.
NOTE
6 – COMMITMENTS AND CONTINGENCIES
The
Company entered into a lease agreement in December 2015 for 2,700 square feet of retail shop space to replace their previous location.
The lease required combined monthly payments of base rent of $1,950 for six months beginning January 2015 with an option for an
additional one year running through June of 2017. The Company continued to operate at this location on a month to month agreement
for $2,100 per month through September 2018.
During
the quarter ended June 30, 2017, the Company entered a 19-month lease with the parents of Jason Chang for Corporate office space
at $1,200 per month running through December 2018.
The
Company entered into a lease agreement in October 2018 for 1,088 square feet of retail shop space for Mom’s Silver Shop.
The lease requires combined monthly payments of base rent and triple net of $1,866 per month for sixty months.
The
Company entered into a lease agreement in October 2018 for the lease of equipment for Mom’s Silver Shop. The lease is for
three years at $60.93 per month.
Future
minimum lease payments are as follows:
Year
Ended December 31,
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
$
|
16,469
|
|
|
$
|
16,939
|
|
|
$
|
17,301
|
|
|
$
|
17,198
|
|
|
$
|
14,960
|
|
LITIGATION
In
December 2013, the Company issued 75,000 shares of common stock to a third party (the “Shareholder”) for consideration
of $16,000. Such consideration was received directly by Jason Chang, CEO, and was not deposited into the Company’s bank
account. As the funds had not been received by the Company, such amounts have been recorded as compensation to Mr. Chang as of
December 31, 2014 (see Note 5). In April 2014, the Company received notice from the Shareholder that he had filed a lawsuit against
the Company and its CEO relating to the delay in the complainants’ stock reaching public listing services. The Company had
made efforts to settle this issue, without an agreement being reached. As such, the Company has recorded a loss contingency based
on its best estimate of all costs to be incurred for the ultimate settlement of this matter. The Company had settled on the amount
$82,660. Repayment was made in December 2017 for $90,000.
On
June 18, 2018, Power Up Lending Group, LTD. (“Power Up”), filed in the Supreme Court of the State of New York that
Sunstock and Jason Chang (president and CFO of Sunstock and board member) and Rammk Clair (board member of Sunstock) materially
breached the October 24, 2017, December 19, 2017, and April 16, 2018 notes payable to Power Up by, in June 2018, changing Sunstock’s
transfer agent in violation of the Notes and Agreements, and existing letter of instructions and authorizations, refusing to provide
a replacement irrevocable letter of instruction from the newly appointed transfer agent and also failing to maintain sufficient
reserves of stock so as to permit and accommodate the conversion requests of Power Up to go forward. Power Up has requested judgment
against Sunstock for $160,180 with default interest, judgment against Sunstock for reasonable legal fees and costs of litigation,
three judgments against Jason Chang and Rammk Clair for $160,180 and interest for each judgment, and a temporary restraining order
and a preliminary and permanent injunction directing Sunstock, Jason Chang, and Rammk Clair to take all steps necessary and proper
to permit the conversion of debt into stock and to deliver the stock to Power Up.
On
June 22, 2018, EMA Financial, LLC (“EMA”) sent a letter to Sunstock stating that Sunstock was in default on the June
5, 2017 note payable and the October 11, 2017 note payable to EMA. Among other defaults, the letter stated that Sunstock was in
default due to refusing to provide a replacement irrevocable letter of instruction from the newly appointed transfer agent and
also failing to maintain sufficient reserves of stock. The letter asks for at least $332,884.
On
December 26, 2018, EMA filed a lawsuit in Federal Court for breach of contract.
On
July 9, 2018, the attorney for Auctus Fund, LLC (“Auctus”) sent a letter to Sunstock stating that Sunstock was in
default on the May 24, 2017 note payable and the October 11, 2017 note payable to Auctus. Among other defaults, the letter stated
that Sunstock was in default due to changing Sunstock’s transfer agent in violation of the note, and existing letter of
instructions and authorizations, refusing to provide a replacement irrevocable letter of instruction from the newly appointed
transfer agent and also failing to maintain sufficient reserves of stock so as to permit and accommodate the conversion requests
of Auctus to go forward. The letters ask for at least $277,397 regarding the May 24, 2017 note payable and at least $299,247 regarding
the October 11, 2017 note payable. On December 26, 2018, AUCTUS filed a lawsuit in Federal Court for breach of contract.
On
July 10, 2018, the attorney for Crown Bridge Partners, LLC (“Crown Bridge”), sent a letter to Sunstock stating that
Sunstock was in default on the December 8, 2017 note payable to Crown Bridge. The letter stated that Sunstock was in default due
to changing Sunstock’s transfer agent in violation of the note, and existing letter of instructions and authorizations,
refusing to provide a replacement irrevocable letter of instruction from the newly appointed transfer agent and also failing to
maintain sufficient reserves of stock so as to permit and accommodate the conversion requests of Crown Bridge to go forward. The
letter requested that Sunstock immediately contact Crown Bridge to demonstrate compliance with the note. On August 15, 2018, the
attorney for Crown Bridge sent another letter to Sunstock stating that Sunstock owed Crown Bridge $221,470, and that if Sunstock
did not respond by August 21, 2018 in regards to payment, then a lawsuit would be filed. No lawsuit has been filed as of June
18, 2019 to the Company’s knowledge.
On
March 7, 2019, the United States Court of Massachusetts issued electronic order 38 stating that the Court granted on the merits
summary judgement on violation of contract claims for the plaintiffs (Auctus Fund, LLC and EMA Financial, LLC) and found Sunstock
in default.
On
May 6, 2019, the United States District Court of the District of Massachusetts issued an Order to Show Cause in the case of Auctus
Fund, LLC and EMA Financial, LLC Vs. Sunstock, Inc. The Court ordered Auctus to show cause within 21 days why the Court had jurisdiction
at the outset of the case and why the Court ought not to vacate its entry of summary judgement for Auctus, EDF No. 38. The Court
said that it had taken no action with regard to EMA’s claim. The Company is currently awaiting a further issuance by the
Court.
On May 30, 2019, the United States District
Court of Massachusetts issued an order in the case of Auctus Fund, LLC vs. Sunstock, Inc. that the Court was satisfied that Auctus
compliant raised colorable securities law claims and, accordingly, the Court ruled that it had subject matter jurisdiction to
enter summary judgment on Auctus’ contract claims.
INDEMNITIES
AND GUARANTEES
The
Company has made certain indemnities and guarantees, under which it may be required to make payments to a guaranteed or indemnified
party, in relation to certain actions or transactions. The Company indemnifies its directors, officers, employees and agents,
as permitted under the laws of the State of Delaware. In connection with its facility leases, the Company has agreed to indemnify
its lessors for certain claims arising from the use of the facilities. The duration of the guarantees and indemnities varies,
and is generally tied to the life of the agreement. These guarantees and indemnities do not provide for any limitation of the
maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated nor
incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities and guarantees
in the accompanying balance sheets.
NOTE
7 – OUTSTANDING DEBT
Convertible
notes are as follows as of December 31, 2018:
|
|
Outstanding as of December 31, 2018
(1)
(2)
|
|
|
Debt
Discount
|
|
|
Net
Amount
|
|
|
Interest
rate
|
|
|
Accrued
Interest
|
|
|
Maturity
(2)
|
|
Auctus
May 24, 2017
|
|
$
|
239,551
|
|
|
$
|
-
|
|
|
$
|
239,551
|
|
|
|
12
|
%
|
|
$
|
62,297
|
|
|
|
February
18, 2018
|
|
EMA
June 5, 2017
|
|
|
166,442
|
|
|
|
-
|
|
|
|
166,442
|
|
|
|
10
|
%
|
|
|
21,122
|
|
|
|
June
5, 2018
|
|
Auctus
October 11, 2017
|
|
|
212,500
|
|
|
|
(982
|
)
|
|
|
211,518
|
|
|
|
12
|
%
|
|
|
62,297
|
|
|
|
October
11, 2018
|
|
EMA
October 11, 2017
|
|
|
166,442
|
|
|
|
(982
|
)
|
|
|
165,460
|
|
|
|
12
|
%
|
|
|
21,122
|
|
|
|
October
11, 2018
|
|
Power
Up October 21, 2017
|
|
|
1,770
|
|
|
|
(981
|
)
|
|
|
789
|
|
|
|
12
|
%
|
|
|
7,190
|
|
|
|
October
21, 2018
|
|
Crown
Bridge December 8, 2017
|
|
|
97,500
|
|
|
|
(982
|
)
|
|
|
96,518
|
|
|
|
8
|
%
|
|
|
7,884
|
|
|
|
December
8, 2018
|
|
Power
Up December 21, 2017
|
|
|
79,500
|
|
|
|
(981
|
)
|
|
|
78,519
|
|
|
|
12
|
%
|
|
|
9,482
|
|
|
|
|
|
Power
Up April 16, 2018
|
|
|
79,500
|
|
|
|
(981
|
)
|
|
|
78,519
|
|
|
|
12
|
%
|
|
|
7,426
|
|
|
|
September
30, 2018
|
|
|
|
$
|
1,043,205
|
|
|
$
|
(5,889
|
)
|
|
$
|
1,037,316
|
|
|
|
-
|
|
|
$
|
198,820
|
|
|
|
-
|
|
Derivative
liability
|
|
$
|
2,356,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Included in this amount are estimated aggregate penalties of approximately $563,486 resulting from various events of default.
The related penalties are estimates and the actual amounts to be paid could be significantly different. See discussions in NOTE
6.
(2)
All notes are currently in default and due on demand and the Company is currently in litigation with all noteholders.
During
the year ended December 31, 2018, the Company recorded an aggregate of approximately $173,000 of debt discount to interest expense.
During
the year ended December 31, 2017, the Company recorded an aggregate of approximately $560,000 of debt discount and $550,000 of
excess derivative fair value to interest expense upon issuance of the convertible notes.
On
May 24, 2017, the Company entered a Convertible Promissory Note with Auctus Fund, LLC., (“Auctus”) in the principle
amount of $112,250 (the “Auctus Note”) The Auctus Note bears interest at the rate of 12% per annum (24% upon an event
of default) and was due and payable on February 24, 2018. The note is currently in default. The principle amount of the Auctus
Note and all accrued interest is convertible at the option of the holder at the lower of (a) 55% multiplied by the average of
the two lowest trading prices during the 25 trading days prior to the date of the note and (b) 55%, (a 45% discount) multiplied
by the average market price (the trading period preceding 25 days of the conversion date). The variable conversion term was a
derivative liability and the Company recorded approximately $100,000 of debt discount upon issuance. The prepayment amount ranges
from 135% to 140% of the outstanding principle plus accrued interest of the note, depending on when such prepayment is made. In
addition, the Company recognized issuance costs of $12,750 on the funding date and amortized such costs as interest expense over
the term of the note. The Company recorded approximately $159,000 in default penalty that was added to the note as of December
31, 2018.
NOTE
7 – OUTSTANDING DEBT (CONTINUED)
On
June 5, 2017, the Company entered a Convertible Promissory Note with EMA Financial, LLC., (“EMA”) in the principle
amount of $115,000 (the “EMA Note”). The EMA Note bears interest at the rate of 10% per annum (24% upon an event of
default) and is due and payable on June 5, 2018. The principle amount of the EMA Note and all accrued interest is convertible
at the option of the holder at the lower of (a) the closing sales price 50% and (b) (a 50% discount) multiplied by the average
market price (the trading period preceding 25 days of the conversion date) or the closing bid price. The variable conversion term
was a derivative liability, see Note 7, and the Company recorded approximately $115,000 of debt discount upon issuance and is
amortizing such costs to interest expense over the term of the note. The prepayment amount ranges from 135% to 150% of the outstanding
principle plus accrued interest of the note, depending on when such prepayment is made. In addition, the Company recognized issuance
costs of $6,900 on the funding date and is amortizing such costs as interest expense over the term of the note. The Company recorded
approximately $109,000 in default penalty that was added to the note as of December 31, 2018.
On
October 11, 2017, the Company entered into a securities purchase agreement (“SPA AUC”) with Auctus Fund, LLC, upon
the terms and subject to the conditions of SPA3, we issued a convertible promissory note in the principal amount of $85,000.00
(the “Note”) to Auctus. The Company received proceeds of $77,000.00 in cash from Auctus. Interest accrues on the outstanding
principal amount of the Note at the rate of subject 12% per annum (24% upon an event of default). The Note is due and payable
on July 11, 2018. The Note is convertible into common stock, subject to Rule 144, at any time after the issue date, at the lower
of (i) the closing sale price of the common stock on the on the trading day immediately preceding the closing date, and (ii) 50%
of the lowest sale price for the common stock during the two (2) lowest trading days during the twenty-five (25) Trading Day period
ending on the last complete Trading Day prior to the Conversion Date. The variable conversion term was a derivative liability
and the Company recorded approximately $74,000 of debt discount upon issuance, which is being amortized to interest expense over
the life of the note Regarding the Note, the Company paid Auctus $10,750 for its expenses and legal fees. The Company recorded
approximately $127,000 in default penalty that was added to the note as of December 31, 2018.
On
October 11, 2017, the Company entered into a securities purchase agreement (“SPA4”) with EMA Financial, LLC (“EMA2”),
upon the terms and subject to the conditions of SPA4, we issued a convertible promissory note in the principal amount of $85,000.00
(the “Note4”) to EMA. The Company received proceeds of $79,395.00 in cash from EMA2. Interest accrues on the outstanding
principal amount of the Note4 at the rate of 10% per annum (24% upon an event of default). The Note4 is due and payable on October
11, 2018. The Note4 is convertible into common stock, subject to Rule 144, at any time after the issue date, at the lower of (i)
the closing sale price of the common stock on the on the trading day immediately preceding the closing date, and (ii) 50% of the
lowest sale price for the common stock during the twenty (25) consecutive trading days immediately preceding the conversion date.
The variable conversion term was a derivative liability and the Company recorded approximately $85,000 of debt discount upon issuance,
which is being amortized to interest expense over the life of the note. If the closing sale price at any time fall below $0.17
or less. (as appropriately and equitably adjusted for stock splits, stock dividends, stock contributions and similar events),
then such 50% figure mentioned above shall be reduced to 35%. In connection with the EMA Note, the Company paid EMA2 $5,100 for
its expenses and legal fees. The Company recorded approximately $81,000 in default penalty that was added to the note as of December
31, 2018.
NOTE
7 – OUTSTANDING DEBT (CONTINUED)
On
October 24, 2017, the Company entered into a securities purchase agreement (“SPA5”) with Powerup Lending Group, LTD
(“POWER”), upon the terms and subject to the conditions of SPA5, we issued a convertible promissory note in the principal
amount of $108,000.00 (the “Note5”) to POWER. The Company received proceeds of $108,000 in cash from POWER. Interest
accrues on the outstanding principal amount of the Note5 at the rate of 12% per annum (22% upon an event of default). The Note5
is due and payable on July 30, 2018. The Note5 is convertible into common stock, subject to Rule 144, at any time after the issue
date, at the lower of (i) the closing sale price of the common stock on the on the trading day immediately preceding the closing
date, and (ii) 61% of the lowest three sale prices for the common stock during the fifteen (15) consecutive trading days immediately
preceding the conversion date. The variable conversion term was a derivative liability and the Company recorded approximately
$108,000 of debt discount upon issuance, which is being amortized to interest expense over the life of the note. If the closing
sale price at any time fall below $0.17 or less. (as appropriately and equitably adjusted for stock splits, stock dividends, stock
contributions and similar events), then such 61% figure mentioned above shall be reduced to 39%. In connection with the Note5,
the Company paid POWER $3,000 for its expenses and legal fees. The Company recorded approximately $590 in default penalty that
was added to the note as of December 31, 2018.
On
December 8, 2017, the Company entered into a securities purchase agreement (“SPA3”) with Crown Bridge Partners, LLC
(“CROWN”), upon the terms and subject to the conditions of SPA6, we issued a convertible promissory note in the principal
amount of $65,000.00 (the “Note6”) to CROWN. The Company received proceeds of $56,000 in cash from CROWN. Interest
accrues on the outstanding principal amount of the Note6 at the rate of 8% per annum (15% upon an event of default). The Note6
is due and payable on December 8, 2018. The Note6 is convertible into common stock, subject to Rule 144, at any time after the
issue date, at the lower of (i) the closing sale price of the common stock on the on the trading day immediately preceding the
closing date, and (ii) 55% of the lowest sale price for the common stock during the twenty (25) consecutive trading days immediately
preceding the conversion date. If the closing sale price at any time fall below $0.10 or less. (as appropriately and equitably
adjusted for stock splits, stock dividends, stock contributions and similar events), then such 55% figure mentioned above shall
be reduced to 45%. The variable conversion term was a derivative liability and the Company recorded approximately $65,000 of debt
discount upon issuance, which is being amortized to interest expense over the life of the note. In connection with the Note6,
the Company paid CROWN $2,500 for its expenses and legal fees. The Company recorded approximately $32,000 in default penalty that
was added to the note as of December 31, 2018.
On
December 21, 2017, the Company entered into a securities purchase agreement (“SPA7”) with Powerup Lending Group, LTD
(“POWER2”), upon the terms and subject to the conditions of SPA7 we issued a convertible promissory note in the principal
amount of $53,000 (the “Note7”) to POWER2. The Company received proceeds of $50,000 in cash from POWER2. Interest
accrues on the outstanding principal amount of the Note7 at the rate of 12% per annum (22% upon an event of default). The Note7
is due and payable on September 30, 2018. The Note7 is convertible into common stock, subject to Rule 144, at any time after the
issue date, at the lower of (i) the closing sale price of the common stock on the on the trading day immediately preceding the
closing date, and (ii) 61% of the lowest three sale prices for the common stock during the fifteen (15) consecutive trading days
immediately preceding the conversion date. If the closing sale price at any time fall below $0.10 or less. (as appropriately and
equitably adjusted for stock splits, stock dividends, stock contributions and similar events), then such 61% figure mentioned
above shall be reduced to 39%. In connection with the Note7, the Company paid POWER2 $3,000 for its expenses and legal fees. The
Company recorded approximately $26,000 in default penalty that was added to the note as of December 31, 2018.
NOTE
7 – OUTSTANDING DEBT (CONTINUED)
On
April 16, 2018, the Company entered into a securities purchase agreement (“SPA8”) with Powerup Lending Group, LTD
(“POWER3”), upon the terms and subject to the conditions of SPA8 we issued a convertible promissory note in the principal
amount of $53,000.00 (the “Note8”) to POWER3. The Company received proceeds of $50,000 in cash from POWER3. Interest
accrues on the outstanding principal amount of the Note8 at the rate of 12% per annum (22% upon an event of default. The Note8
is due and payable on January 30, 2019. The Note8 is convertible into common stock, subject to Rule 144, at any time after the
issue date, at the lower of (i) the closing sale price of the common stock on the on the trading day immediately preceding the
closing date, and (ii) 61% of the lowest sale price for the common stock during the fifteen (15) consecutive trading days immediately
preceding the conversion date. In connection with the Note8, the Company paid POWER3 $3,000 for its expenses and legal fees. The
Company recorded approximately $26,000 in default penalty that was added to the note as of December 31, 2018.
NOTE
8 – DERIVATIVE LIABILITIES
The
Company evaluates its debt instruments, or other contracts to determine if those contracts or embedded components of those contracts
qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40, Derivative Instruments
and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value
of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded
as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement
of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked
to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially
classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at
the fair value of the instrument on the reclassification date.
The
Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument,
or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument
or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially
settled in an entity’s own common stock.
From
time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion features contain
price protection or anti-dilution features that result in these instruments being treated as derivatives for accounting purposes.
Accordingly, the Company has classified all conversion features as derivative liabilities as of December 31, 2018, and has estimated
the fair value of these embedded conversion features using a binomial options pricing model with the following assumptions:
|
|
For
the Year ended
December 31,
2018
|
|
|
|
|
|
Annual
Dividend yield
|
|
|
0
|
%
|
Expected
life (years)
|
|
|
0.75
|
|
Risk-free
interest rate
|
|
|
2.09%
- 2.63
|
%
|
Expected
volatility
|
|
|
207%
- 408
|
%
|
NOTE
8 – DERIVATIVE LIABILITIES (CONTINUED)
The
following table presents the changes in fair value of our embedded conversion features measured at fair value on a recurring basis
for the year ended December 31, 2018:
Balance
December 31, 2017
|
|
$
|
1,009,896
|
|
Allocation of derivative recorded as debt discount
|
|
|
53,000
|
|
Settlement
due to conversions
|
|
|
(913,594
|
)
|
Change
in fair value
|
|
|
2,207,585
|
|
Balance
as of December 31, 2018
|
|
$
|
2,356,887
|
|
NOTE
9 - STOCKHOLDER’S EQUITY (DEFICIT)
The
Company is authorized to issue 8,000,000,000 shares of common stock and 20,000,000 of preferred stock.
During
the year ended December 31, 2018, the Company received an aggregate of $127,938 from the issuance of 7,341,755 shares of its common
stock.
During
the year ended December 31, 2018, the Company converted $184,949 of notes payable and $6,214 of accrued interest
into 35,403,811 shares of its common stock. The fair value of the shares, derivative liability and accelerated discount
resulted in a loss of approximately $110,000.
During the year ended December 31, 2018, the
Company converted $50,000 of notes payable to officer into 33,300,000 shares of its common stock, which resulted in a loss
from settlement of debt of $729,220.
During
the year ended December 31, 2018, the Company issued 258,218,245 shares of its common stock for services with a fair market value
of $5,294,327, of which $357,750 was expensed in the year ended December 31, 2018 and $573,750 was prepaid expense at December
31, 2018
During
the year ended December 31, 2017, the Company received an aggregate of $13,570 (net of approximately $6,000 subscription receivable
forgiven) from the issuance of 17,589 shares of its common stock. In addition, the Company issued upon conversion of issued notes
payable and accrued interest of approximately $18,500 for convertible notes in relation to 200,000 shares of common stock.
During
the year ended December 31, 2017, the Company issued 28,708,141 shares of fully vested non-forfeitable shares of common stock
to certain employees and consultants for future services. The fair value of the shares issued was determined to be approximately
$32,660,000, and the remaining amount was recorded as prepaid consulting. During the year ended December 31, 2017, the Company
amortized approximately $32,642,000 to stock based compensation expense related to these issuances. In addition, the Company recorded
approximately $2,520,000 of compensation expense in 2017 related to the vesting of shares issued in 2016.
During
the year ended December 31, 2017, the Company’s chief executive officer was awarded 18.05 shares million of the Company’s
common stock for services valued at an aggregate of approximately $19,500,000 (based on the closing price on the grant
date), in exchange for $9,050 in cash and the remaining amount was recorded as stock based compensation
expense in the accompanying statement of operations as the amount was earned through December 31, 2017.
NOTE
9 - STOCKHOLDER’S EQUITY (DEFICIT) (CONTINUED)
During
2016, the Company issued an aggregate of 330,000 shares of fully vested non-forfeitable shares of common stock to certain consultants
of the Company to be earned over a one-year period. The Company also received proceeds of $720. The shares were valued at $403,500
(based on the closing market price on the measurement date) and have been recorded as prepaid consulting in the accompanying condensed
balance sheet. The Company has amortized $376,330 of such expense during the year ended December 31, 2016 and $27,170 during the
year ended December 31, 2017.
NOTE
10 - INCOME TAXES
The
Company is subject to taxation in the United States of America and the state of California. The provision for income taxes for
the years ended December 31, 2018 and 2017 is summarized below:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
800
|
|
|
|
800
|
|
Total
current
|
|
|
800
|
|
|
|
800
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
9,810,841
|
|
|
|
12,675,722
|
|
State
|
|
|
2,690,992
|
|
|
|
2,140,461
|
|
Change
in valuation allowance
|
|
|
(12,501,833
|
)
|
|
|
(14,816,183
|
)
|
Total
deferred
|
|
|
-
|
|
|
|
-
|
|
Income
tax provision(benefit)
|
|
$
|
800
|
|
|
$
|
800
|
|
A
reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s loss before income
taxes to the income provision is as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
U.S.
federal statutory tax rate
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
State
tax benefit, net
|
|
|
(0.0085
|
)%
|
|
|
(0.0023
|
)%
|
Stock
based compensation
|
|
|
(11.1472
|
)%
|
|
|
(33.0975
|
)%
|
Other
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Valuation
allowance
|
|
|
(9.8494
|
)%
|
|
|
(0.9010
|
)%
|
Effective
income tax rate
|
|
|
(0.0085
|
)%
|
|
|
(0.0023
|
)%
|
NOTE
10 INCOME TAXES (CONTINUED)
Deferred
tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred
tax assets are as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
NOL’s
|
|
$
|
1,621,187
|
|
|
$
|
659,748
|
|
State
taxes
|
|
|
-
|
|
|
|
-
|
|
Inventory
and other reserves
|
|
|
-
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
-
|
|
|
|
-
|
|
NQ
stock option expense
|
|
|
10,880,646
|
|
|
|
14,156,435
|
|
Total
deferred tax assets
|
|
|
12,501,833
|
|
|
|
14,816,183
|
|
Valuation
allowance
|
|
|
(12,501,833
|
)
|
|
|
(14,816,183
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Realization
of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the
net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by approximately $2,300,000
for the year ended December 31, 2018.
As
of December 31, 2018, the Company had net operating loss carryforwards for federal income tax purposes of approximately $1,300,000
which expire beginning in the year 2032. As of December 31, 2018, the Company had net operating loss carryforwards for state income
tax purposes of approximately $325,000 which expire beginning in the year 2032.
Utilization
of the net operating losses may be subject to substantial annual limitation due to federal and state ownership change limitations
provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of
the net operating losses ad credits before their utilization. The Company has not performed an analysis to determine the limitation
of the net operating loss carryforwards.
NOTE
11. PURCHASE OF MOM’S SILVER SHOP
On October 22, 2018, Sunstock, Inc. acquired all assets and liabilities of Mom’s Silver Shop, Inc. of
Sacramento, California. Included in the assets acquired was approximately $60,000 in precious metals inventory and approximately
$13,000 in net fixtures. Also included were any licenses and permits, customer lists, logo, trade names, signs, and websites. Financing
of the purchase was by $16,592 cash, $33,000 unsecured note payable with principle payments of $1,000 per week for 33 weeks starting
January 1, 2019 with 4.5% annual interest accrued on the unpaid balance (total accrued interest due August 27, 2019), and the assumption
of liabilities and lease obligations. Mom’s Silver Shop had unaudited net revenues of approximately $3,800,000 for the year
ended December 31, 2017, and $2,500,000 in 2018 to the date of acquisition. Mom’s Silver Shop specializes in buying and selling
gold, silver, and rare coins, and is one of the leading precious metals retailers in the greater Sacramento metropolitan area,
which compliments our precious metals business.
The
following summarizes the transaction with Mom’s Silver Shop at closing on October 22, 2018:
Prepaid expenses
|
|
$
|
10,449
|
|
Inventory – coins
|
|
|
60,549
|
|
Property & equipment, net
|
|
|
13.279
|
|
Total Assets
|
|
$
|
84,277
|
|
|
|
|
|
|
Accounts payable & accrued expenses
|
|
|
(558
|
)
|
Net Purchase
|
|
$
|
83,719
|
|
The Company paid $16,592 cash and issued a note payable in the amount of $32,976 to the owners of Mom’s
Silver Shop.
The
following unaudited supplemental pro forma information for the year ended December 31, 2018.7 and the year ended December 31,
2017 assumes the acquisition of Mom’s Silver Shop had occurred as of January 1, 2018 and 2017, giving effect to purchase
accounting adjustments such as amortization of intangible assets. The pro forma data is for informational purposes only and may
not necessarily reflect the actual results of operations had the assets of Mom’s Silver Shop been operating as part of the
Company since January 1, 2018 and 2017.
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Revenues
|
|
$
|
2,944,852
|
|
|
$
|
3,785,443
|
|
Expenses
|
|
|
12,399,836
|
|
|
|
40,046,832
|
|
Net Loss
|
|
$
|
(9,454,984
|
)
|
|
$
|
(36,261,389
|
)
|
NOTE
12 – SUBSEQUENT EVENTS
In
January, February, and March 2019, the Chief Executive Officer of the Company purchased an aggregate of 195,000,000 shares for
a total of $79,350.
On
March 7, 2019, the United States Court of the District of Massachusetts issued electronic order 38 stating that the Court granted
on the merits summary judgement on violation of contract claims for the plaintiffs (Auctus Fund, LLC and EMA Financial, LLC) and
found Sunstock in default.
On
May 6, 2019, the United States District Court of the District of Massachusetts issued an Order to Show Cause in the case of Auctus
Fund, LLC and EMA Financial, LLC vs. Sunstock, Inc. The Court ordered Auctus to show cause within 21 days why the Court had jurisdiction
at the outset of the case and why the Court ought not to vacate its entry of summary judgement for Auctus, EDF No. 38. The Court
said that it had taken no action with regards to EMA’s claims. The Company is currently awaiting a further issuance by the
Court.
On
May 30, 2019, the United States District Court of Massachusetts issued an order in the case of Auctus Fund, LLC vs. Sunstock,
Inc. that the Court was satisfied that Auctus compliant raised colorable securities law claims and, accordingly, the Court ruled
that it had subject matter jurisdiction to enter summary judgment on Auctus’ contract claims.